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Economics Legislation Committee
Minerals Resource Rent Tax Repeal and Other Measures Bill 2013
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Economics Legislation Committee
Pratt, Sen Louise
Williams, Sen John
Dastyari, Sen Sam
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Economics Legislation Committee
(Senate-Wednesday, 27 November 2013)
CHAIR (Senator Bushby)
- Mr Lyons
Content WindowEconomics Legislation Committee - 27/11/2013 - Minerals Resource Rent Tax Repeal and Other Measures Bill 2013
ANDERSON, Mr Peter, Chief Executive, Australian Chamber of Commerce and Industry
BURN, Dr Peter, Director, Public Policy, Australian Industry Group
MAMMONE, Mr Daniel, Director, Workplace Policy; and Director, Legal Affairs, Australian Chamber of Commerce and Industry
WILSON, Mr Burchell, Acting Chief Economist; and Acting Director, Economics and Industry Policy, Australian Chamber of Commerce and Industry
Evidence was taken via teleconference—
CHAIR: Thank you very much for appearing today. We are running a bit over time already, so in the interests of ensuring we have the opportunity to ask questions I invite one representative from each agency to make an opening statement of no more than two minutes each. That would be appreciated.
Mr Anderson : Thank you. The committee has our submission by letter of 21 November. There are three matters that we raised for the attention of the committee: firstly, our support for the repeal legislation and our observation that the mineral resource rent tax was not a measure that we supported upon its implementation; therefore we do support its repeal. That was based largely on the fact that the industry concerned with the application and implementation of that tax did not support the measure.
Secondly, we strongly support the measure that relates to the suspension of the two proposed further increases in the superannuation guarantee levy in 2014 and 2015. This is a matter on which ACCI has substantially informed the committee previously when the legislation was first taken through the parliament in the 2011.
Thirdly, our qualification to our position on the bill is that we do support the retention of the instant asset write-off provisions and the provisions relating to carry-back of losses, which are measures that support small business.
We understand that those measures were included as part of the mining tax package originally. That was an approach that we feared would lead to those matters being linked to the fate of the mining tax. We did not support coupling them in the first place. Our submission supports their decoupling and their independent operation and financing by the Commonwealth. In the interests of time, I will leave my remarks there.
CHAIR: Does the Australian Industry Group have an opening statement?
Dr Burn : Thank you for the opportunity to appear and to make these comments. We have also made a submission. I am pleased to say that—although maybe, in some cases, for different reasons—we are very much on a unity ticket here with the chamber. The considerations that went into our submission were the policy case for the different measures, the need for fiscal discipline and the need to reduce costs on business, to increase investment and to decrease regulatory burdens. We were also mindful of the more comprehensive review of taxation that the new government has flagged.
In short, we support the repeal of the minerals resource rent tax, we support the removal of the special accelerated depreciation facilities for motor vehicle write-off by small business, we support the repeal of the geothermal exploration measures, we support the pause to the superannuation contributions guarantee levy, we support the repeal of the low-income super measures and we support the repeal of the income support bonus and schoolkids measures. We do not support the repeal of the loss carryback provisions and we do not support the proposal to reduce the small business asset write-off threshold. I am happy to take any questions.
CHAIR: Both the chamber and AIG have indicated that you do not support some of the repeal measures, particularly those involved with business tax incentives, but you have also indicated that you support the need for fiscal discipline. How do you see those measures being financed if they are not to be financed out of the supposed proceeds of the MRRT?
Dr Burn : I will have a first shot at that. The issue is whether or not these things make sense in supporting growth in the economy, so generating greater tax revenue down the line. We think the answer is yes and that encouraging investment by small business, reducing regulatory burdens faced by small business and reducing somewhat the problem in our tax system of the asymmetrical treatment of tax losses would help grow the economy and the tax base.
We note secondly that these measures are timing measures. These measures are about when deductions are claimed not whether they can be deducted. So the revenue estimates presented across the forward estimates grossly overstate the net present value of these measures to the Commonwealth.
CHAIR: ACCI mentioned the tax review and I think you did too, Dr Burn. Could those issues not be rolled into the tax review along with some of the other issues being raised by other witnesses today?
Dr Burn : They could very well be, however, right now the Australian economy faces a large gap in investment, particularly outside the mining sector. This is an issue that the Reserve Bank, for example, has been raising. It is an issue that the Commonwealth Treasury has been raising. The proposal to remove the instant write-off facility for small business will have a material impact on them and will decrease investment at the time it is needed most. Waiting for the tax review in these cases is poor timing. We need this investment now because mining investment is coming off and there is no adequate pick-up in investment across the board. It is in fact a timing measure and the timing need is right now.
CHAIR: But there are other measures a government could put in place that presumably the government will be looking at—and some of those other measures might also work to achieve some of those outcomes you are talking about.
Dr Burn : Yes, but where are they?
CHAIR: But that is not the only way of achieving that. This is one way, and I acknowledge that, but there are other things that government could do to tackle the problems the RBA is talking about.
Dr Burn : They could, and we could look at those when they are revealed.
Senator PRATT: Can you expand on the benefits to the community of the loss carryback.
Dr Burn : There are two benefits for the loss carryback. At present, a company in a loss-making year does not pay tax, nor is it entitled to a tax refund, even though when it makes a profit it pays a tax in the year that it makes the profit. It is entitled to claim that loss later on—when it next makes a profit it can claim that loss back against that profit in a subsequent year. However, waiting for that is recognised as a cost on business, across the globe. Most countries have loss carryback or other provisions that deal with this asymmetrical treatment of losses. Businesses making a loss need cash now. Rather than having a contingent asset on their books, if you like—that is, an ability to claim money when they are making money—loss carryback would be much better for them and for their businesses, and would reduce the business closure and so on that results when businesses go through this cash flow crisis in a year they make a loss. Symmetrical treatment of tax losses would alleviate that quite considerably. The present law gives them access on a limited basis to some of the tax they paid in the previous year, in the year they make a loss. This a provides a very important boost to their cash flow at a time when they need it most and at a time when it is going to be most critical in ensuring the survival of that business.
Senator PRATT: It is not that different to how the minerals resource rent tax provides a rebate from royalties during the capital expenditure phase of development, is it?
Dr Burn : That is right—it is the same principle. And it is the right principle.
Senator PRATT: Your submission states that current limitations on the use of tax losses will discourage entrepreneurship and risk-taking, as well as disadvantage small businesses and firms engaged in more risky investment. Can you expand on the link between that capacity to deal with the loss carryback and future investment.
Dr Burn : A business will make an investment based largely on the net present value of its after-tax return. That investment will face a risk profile, so in some years it may well face a loss. If those losses can only be claimed against profits for tax purposes later on, in profit years, the net present value of its investments will fall, because it has to wait longer for the cash flow. The other point is that the real value of the losses erodes over time. Losses are not indexed, and if you have to wait three years to get the benefit of your tax losses against future profits that is a significant erosion of the real value of those losses. So the net present value of the after-tax profits falls noticeably when you allow for loss-making years in your calculations. That then reduces the return on those investments and reduces also the likelihood that those investments will be made.
Senator PRATT: What economic modelling have you done on these benefits, particularly given, as you have already indicated in your presentation, with mining capital expenditure coming down there is a need to rely more on other sectors of the industry for an investment phase?
Dr Burn : We have not done any modelling on this issue, but we were part of the business tax review where modelling was undertaken. I would refer you to the business tax review which recommended the introduction of these limited loss carry-back provisions. We have not done any modelling ourselves but that review certainly looked at it in greater detail.
Mr Anderson : In addition to the points Dr Burn made, it should also be recognised that these measures act as stimulus measures. The judgement that we have made, and we believe the Commonwealth should be making, is that with economic growth having slowed over the course of the past year, particularly with the labour market softening, there is a case for some other policy levers to be used to try to act as economic stimulus rather than putting such heavy weight on the Reserve Bank and the use of monetary policy. That is why we say these measures should be independently assessed and should stand alone from both the politics and the substance of the minerals resource rent tax issue. They do act as stimulus, particularly with respect to the investment allowance proposition and the right-off arrangements. They are not dissimilar to one element of the stimulus package that followed the 2008 financial crisis which was an investment allowance that similarly provided a cash flow advantage as well as an investment incentive for business people, particularly for the purchasers of capital equipment. Whilst I have not seen economic modelling with respect to the effect of those measures, I have certainly seen a large amount of commentary as well as, I can report, feedback from industry that they were materially significant to support additional stimulus in the economy at that time.
I think there is something in the recent past we can go back to to say that comparable measures have had a stimulatory effect and our view is that other policy levers need to be put in place to support that. Clearly, this needs to be funded in order for it to be durable. Our criticism, often initially, was that it was linked to a tax, the revenue implications of which were quite uncertain and it has been shown to be thus. Our view is that, in the context of the overall Commonwealth budget, these measures are relatively small, particularly in circumstances where the incoming government is putting in place and able to put in place some different approaches to spending priorities leading up to the May budget next year. There should be mechanisms found inside the overall budget to keep funding these two measures.
Senator WILLIAMS: The MRRT was put together before the 2010 election from the superprofits tax proposed by former Prime Minister Kevin Rudd. Do you think it has been a deterrent to foreign investment and growth in the mining industry?
Mr Anderson : The industry players themselves are better positioned but I think we can indicate that not just the measure itself but the debate around the measure and the high level of questioning within the public and economic community about the measure and its iterations did contribute and was one of the elements that contributed to a reduction in business confidence, and business confidence includes investment confidence. Certainly we had quite significant different iterations of this tax. We had failures of consultation, particularly in its initial form. We have also seen that the tax even raised issues of sovereign risk in the public debate. As leader of the ACCI, I was extremely concerned to see any notions of sovereign risk elevated into the Australian economic debate. Whether they were real or imagined, they became part of the debate, and that therefore was a perception that affected business and investment confidence.
Senator WILLIAMS: Yes, because we have seen huge investment over the last decades in the mining industry. That has clearly tapered off now and perhaps is in decline as far as investing in new projects yet is concerned. With the growth of China—and hopefully that will continue—you would question why there is the tapering off in investment into the mining industry especially. I do not think anyone disagrees that the minerals in the ground are owned by the state—by the Crown—and that we should get a fair share of those minerals, but couldn't this have been a case where the states raise their royalty taxes, as many of them did, and then perhaps take off some of the burden of the money that the federal government pays to the states? Money saved is money made, isn't it?
Mr Anderson : There are a range of competing and legitimate policy considerations in designing tax arrangements for this industry. We appropriately have left those matters to the industry to discuss and negotiate within the industry in the first instance and then with the government of the day. But what I think is also very relevant is that the way in which this debate developed across 2010 and then 2011 certainly contributed to a sapping of confidence inside the supply chains. This is an industry that unquestionably has cyclical upturns and downturns and is trade exposed, so there will be more than simply domestic tax factors at play in terms of its investment and the like. But this was a very unsatisfactory experience in public policy and tax policy for the broader economy and one which we think should be put behind us.
Dr Burn : On the issue of the tapering off of mining investment, I totally agree with my colleague Peter Anderson here on the impact on business confidence and the flow-on impacts to investment. I just want to inject a note of realism here a little bit, because mining investment is still at very, very high levels. Of course it is coming off; there was no way that we were ever going to sustain the level of investment that we saw over the last five years or so. This was an extraordinary period, and it was recognised as such by all at the time. It was always going to fall off. The impact of the minerals resource rent tax and the kerfuffle surrounding it was a minor factor in the reason why that historical level of investment is slipping down a little bit—but still is very high.
Senator WILLIAMS: Yes, good.
Senator DASTYARI: I have a few questions—and I am very conscious of time—about the instant asset write-off. I note that both the submissions that your organisations have made have been pretty clear about why you believe the instant asset write-off is something that is worth supporting, but I would like to ask more specifically whether you guys want to comment a little bit more broadly—I have a few questions on that—about what role the instant asset write-off was playing in encouraging small business investment.
Dr Burn : There are a couple of things that it does. It increases cash flow so that, instead of waiting over the life of the asset to recover its nominal value as a tax deduction, with a $6,500 threshold you can claim a very large proportion of it in the year that it is made. So this boosts cash flow. It changes quite drastically the net present value calculations of any particular investment because it boosts their cash flow. Of course it reduces cash flow in subsequent years, because it is, after all, only a bring-forward of the depreciation deductions.
The second element—and in some ways more important, particularly for the small businesses to which it applies—is that the recordkeeping is very much reduced. Everyone who has been a small business person knows what a hassle it is to trace, over the life of an asset, the deductions that have been made in previous years and the statutory accelerated depreciation rates and to make small deductions over a number of years. Making a single big deduction in the year that it is purchased is simple. It relieves business of all the paperwork, it reduces the costs they have to pay to their accountants and it gives them more time in their businesses—less money to the accountants and more money for reinvestment.
Senator DASTYARI: Dr Burn, on page 5 of your submission, you state:
The contribution of the small business sector to the growth of the economy and of the tax base will be correspondingly lower than it would be if the measures were retained.
Do you have any numbers in that area or has any modelling been done? Are you able to quantify the impact that you believe it will have on economic growth and the tax base? Your submission also states:
Secondly, the PBO’s approach does not take into consideration the indirect impacts on business cash flows and investment that the removal of these measures will impose.
Your submission quite strongly puts forward the view that the impact is greater than the PBO's calculations. Do you have any figures or modelling to that effect?
Dr Burn : Thank you for that opportunity. We do not have an issue with the estimated value that the PBO put on the cash impact over the next three years—that is, the forward estimate period. In short, they are saying that $2.905 billion will be taken out of small business and handed to the Commonwealth if this threshold is reduced to 1,000. That is the impact over the next few years. Our qualification that the PBO approach does not take into consideration the indirect impacts later on is really an issue that, if this threshold is reduced, they will be able to claim several years down the track the same deductions. But the net present value of those deductions will be lower than if they were able to make the deductions in the year the asset was purchased. The PBO approach concentrates just on this next three years of revenue and does not take into account that, by lowering the threshold, the business cash flow impact will not be that $2.905 billion, because they will be up to claim that back in later years. So our qualification is really that the PBO approach does not take into account that later drawback of the deduction.
Senator DASTYARI: Okay. I will direct my final question to Mr Anderson and Mr Mammone. Although the wording is obviously different, your submission is similar to the submission of Mr Byrne. In relation to the instant asset write-off, you state:
This measure will provide cash flow benefits for the small business sector and simplify their capital allowance arrangements.
Can you expand on your views about the simplification of capital allowance arrangements, specifically referring to the instant asset write-off measures in this bill? How do you feel that their removal would add to the compliance costs for small business?
Mr Anderson : In addition to what Dr Burn had to say, the Henry tax review recommended this, and there is some commentary in the Henry tax review that goes to that very point—
Senator DASTYARI: And your submission to the Henry tax review was quite clear on your support for this, wasn't it?
Mr Anderson : Well, we supported that, and we pointed to the experience of the instant asset write-off during the stimulus package that I mentioned earlier as some support for the way in which this measure can act beneficially to the economy, particularly the period of lower confidence and slower growth. But whilst it is a timing issue, what it does do is provide the essential lubricant for small and medium business people in particular to be able to grow and expand their businesses, and that is access to a greater degree of cash than they otherwise would. And we should not underestimate that, because if they are not getting cash through a measure like this then most of them are having to go out there and borrow on the markets and pay the relevant interest rates and the like on cash and put up further assets as security et cetera. So, it has a beneficial impact not just in providing a mechanism by which they can fund business growth and expansion; it also avoids those businesses having to further mortgage or further put up security in order to access the cash they need for those purposes.
CHAIR: Thank you very much for your assistance with the inquiry this morning.
Mr Anderson : Perhaps I could just make one final comment. We have not spoken about the superannuation guarantee issues. I am aware that in a moment you are going to be speaking to the super industry. I would emphasise that the views of the employers that fund the superannuation guarantee levy are as important if not more so on this question, and I would commend those parts of our submission to the committee.